How much house can we afford (Another One...) and Rent vs Buy decision

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bballjm
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Joined: Mon Nov 01, 2010 11:52 pm

How much house can we afford (Another One...) and Rent vs Buy decision

Post by bballjm » Tue Aug 13, 2019 8:32 am

We live in a fairly HCOL area (not SF or NYC level, but next tier down). We are currently paying $2500/mo in mortgage (incl property taxes) now for a 2BR/2BA. Looking to get a bigger space as our family grows. I’m currently trying to narrow down from $800k-$1.75M purchase price if we were to buy. I don’t want to be house poor, but also have always had the goal of living in a place that I really love. I think this site is one of the best resources available for anything personal finance related so wanted to get the Bogleheads’ thoughts on how much house they think we can afford. Thanks!

Our info:

Age: 33

Marginal Tax bracket: 32-37% depending on yr

Wife’s income: $120k salary + bonus that’s typically ~1.25-1.5x. Salary should continually increase (5-10%/yr), bonus variance but likely over $150k/yr going fwd

My income: $100k salary+ bonus that varies wildly. Good years have been 5-6x salary, but 2019 will likely be $0 bonus for the first time. Future prospects are wildly variable (even including changing jobs or possibly careers), but salary will likely always be ~$100k

Combined net worth: ~$2M

Liquid assets (incl cash/emergency fund): $850k

Illiquid/Retirement: $1M (excl home equity)

HomeEquity: $180k

Debt: All student loans paid off, so just the current mortgage (~$300k)

Current spend: ~$11k month post tax, but childcare exp will jump $3.5-4k/month in 1.5 yrs or so with two kids going to day care (kid 1 current watched by Grandma for free). Def have easy ways to cut expenses by at least $1k+ month if need be though.
529b: Have one of these w about 3k for our 1.5 yr old.

To throw an added layer to this (perhaps a less asked and more interesting question), I’m also seriously considering (probably even leaning) towards renting rather than buying. We’d likely rent a slightly less expensive place, though not drastically so (thinking ~1k of monthly savings compared to a mortgage + prop tax). The wife and I are both tired of spending money/time on home repair, and I think the added flexibility of being able to upsize/downsize easily if my earnings improve/deteriorate + the flexibility of having that extra capital for potential opportunities make it appealing.

I think to me the biggest factor here is the opportunity cost of not being able to invest the down payment (call it $200k). The wife is a partner at her firm and gets an opportunity to purchase a given number of shares each year that have no tax consequences until she begins selling the shares near her retirement. This is a big engineering firm with ~4000 employees, ~$1B in revenue, and a very strong record of stock performance (avg ~13% over the last 20 years w/ S&P at 6.3% in that time frame, with similar std dev of returns and 75% of the downside deviation of S&P) so it’s a relatively safe investment (as far as a single company can be). Additionally, not purchasing the full amount of offered shares sends a bad message and can stall her career development.

Additionally, I run a start-up options trading firm where I can invest alongside and earn the same return the firm earns. It’s a difficult business (see wild fluctuations in my income above) especially when you’re small, but if we end up being successful, there can be exceptional returns. My 5 yr track record is ~25% annualized w/ a min of -5% and max of 50%. I definitely did better as part of a big company though (better cost structure, technology etc) and as everyone on here likely already knows, markets are pretty efficient and tend to get more efficient over time. So there’s a very real risk of the business failing or at least drastically underperforming that 25% long-term. Obviously, I believe in the prospects though and would like to have flexibility to invest a significant amount.

So I think the opp cost of the down payment is higher than in many situations and that there’s some benefits to maintaining optionality w/ that capital. Additionally, I think there’s some added value of the increased flexibility of renting given the high variance nature of my income.
I’ve played around with online ‘rent vs buy’ calculators and built my own, but I’m curious if there are any insights from the Boglehead community that I may be missing. Sorry for the length, brevity has never been a strength…

jharkin
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Location: Boston suburbs

Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by jharkin » Tue Aug 13, 2019 11:51 am

Biggest challenge I see for you guys is the income variability. In years you get all that bonus money it will be smooth sailing, but just one year at zero bonus could put you into negative cashflow with your fixed expenses and expected childcare. Deep into the negative if you add a 1MM+ house. At your age I assume you didn't work though the great recession - after the next one hits you will probably take a very different view on relying on bonus income for planning.

If I where in your shoes you I would calculate the mortgage you could float on base salary, add whatever amount of hte taxable pool you are comfortable throwing on top of that as a down payment and set that as a purchase price cap.

megabad
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Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by megabad » Tue Aug 13, 2019 1:51 pm

Your compensations appear to be extremely volatile and high risk and tied to market performance. As such, I would take much less relative risk in other parts of your life. Just my opinion, but I definitely "risk adjust" ESOP holdings and the like. That said, you have healthy incomes and can certainly support a relatively high rent/mortgage payment. Only you can be the true judge of your "risk" tolerance there. Even with no bonuses, you would still bring in maybe 13k per month after tax (with not saving) so I think you have room to safely increase your home expenses if desired. I would feel pretty ok with a 4500 PITI or rent (which is maybe the lower end of your range), I might feel a little more nervous at $8000.
Last edited by megabad on Tue Aug 13, 2019 3:43 pm, edited 1 time in total.

chevca
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Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by chevca » Tue Aug 13, 2019 3:39 pm

bballjm wrote:
Tue Aug 13, 2019 8:32 am
To throw an added layer to this (perhaps a less asked and more interesting question), I’m also seriously considering (probably even leaning) towards renting rather than buying. We’d likely rent a slightly less expensive place, though not drastically so (thinking ~1k of monthly savings compared to a mortgage + prop tax). The wife and I are both tired of spending money/time on home repair, and I think the added flexibility of being able to upsize/downsize easily if my earnings improve/deteriorate + the flexibility of having that extra capital for potential opportunities make it appealing.

I think to me the biggest factor here is the opportunity cost of not being able to invest the down payment (call it $200k). The wife is a partner at her firm and gets an opportunity to purchase a given number of shares each year that have no tax consequences until she begins selling the shares near her retirement. This is a big engineering firm with ~4000 employees, ~$1B in revenue, and a very strong record of stock performance (avg ~13% over the last 20 years w/ S&P at 6.3% in that time frame, with similar std dev of returns and 75% of the downside deviation of S&P) so it’s a relatively safe investment (as far as a single company can be). Additionally, not purchasing the full amount of offered shares sends a bad message and can stall her career development.

So I think the opp cost of the down payment is higher than in many situations and that there’s some benefits to maintaining optionality w/ that capital. Additionally, I think there’s some added value of the increased flexibility of renting given the high variance nature of my income.
I’ve played around with online ‘rent vs buy’ calculators and built my own, but I’m curious if there are any insights from the Boglehead community that I may be missing. Sorry for the length, brevity has never been a strength…
Did you post this so folks would talk you out of renting? It sure sounds like you would rather rent and put the down payment money to work elsewhere. Sorry, what's your question about all this? I don't believe I read one pro you listed about home ownership for you guys, so.....

I'll throw a question back at you. For what, if any, reasons would you guys even want to buy a house?

Aku09
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Joined: Wed Jan 09, 2019 11:29 am

Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by Aku09 » Tue Aug 13, 2019 4:00 pm

With the huge variation in income due to bonuses I would be a bit more leery of jumping into a large mortgage as other posters have said. I would try to afford a home based on your salaries only (even though I know its hard). You have a pretty large amount of liquid assets. Are you looking to spend most/all of it on a home? I would think with your salary you could afford a 500k home without too much stress just on your salaries. Would it be possible to wait a year or two of good bonuses and keep them all to pay for a home? If you had 2 good years of 500k bonuses that would be 1mil. Then you wouldn't have to worry about affording the house.

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Watty
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Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by Watty » Tue Aug 13, 2019 4:08 pm

bballjm wrote:
Tue Aug 13, 2019 8:32 am
Age: 33

.....

Additionally, I run a start-up options trading firm where I can invest alongside and earn the same return the firm earns. It’s a difficult business (see wild fluctuations in my income above) especially when you’re small, but if we end up being successful, there can be exceptional returns.
One thing that jumped out at me is that you have not been through a bad bear market yet. That alone would to make me cautious.

Your wifes bonuses could also suffer in a bad recession and no one is immune from being laid off when a cyclical business takes a downswing.
bballjm wrote:
Tue Aug 13, 2019 8:32 am
I’m currently trying to narrow down from $800k-$1.75M purchase price if we were to buy. I don’t want to be house poor, but also have always had the goal of living in a place that I really love.
The high end of that range is way too high for you now since you would be depending on your wifes bonus and your position does not seem super stable.

Renting a better place for a few years sounds like a good option and if you could save like crazy for another three years or so you might be in a much better position to buy an expensive house that you will be happy with for the long term.

It was not clear how old your kids are. One thing I would look at is when your oldest kid will starts school and maybe buying a house just before they start 1st grade. That way they would be less likely to need to change schools which can be hard on some kids.

Topic Author
bballjm
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Joined: Mon Nov 01, 2010 11:52 pm

Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by bballjm » Tue Aug 13, 2019 10:16 pm

megabad wrote:
Tue Aug 13, 2019 1:51 pm
Your compensations appear to be extremely volatile and high risk and tied to market performance. As such, I would take much less relative risk in other parts of your life. Just my opinion, but I definitely "risk adjust" ESOP holdings and the like. That said, you have healthy incomes and can certainly support a relatively high rent/mortgage payment. Only you can be the true judge of your "risk" tolerance there. Even with no bonuses, you would still bring in maybe 13k per month after tax (with not saving) so I think you have room to safely increase your home expenses if desired. I would feel pretty ok with a 4500 PITI or rent (which is maybe the lower end of your range), I might feel a little more nervous at $8000.
Yeah I definitely agree w/ your overall point here of being more risk averse in other areas. One note is that my compensation is extremely volatile and high risk, it shouldn't be tied to market performance. My PNL is theoretically uncorrelated to the general market and if anything should do well in a bear market (though time will have to tell on that one).

Topic Author
bballjm
Posts: 11
Joined: Mon Nov 01, 2010 11:52 pm

Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by bballjm » Tue Aug 13, 2019 10:26 pm

chevca wrote:
Tue Aug 13, 2019 3:39 pm
bballjm wrote:
Tue Aug 13, 2019 8:32 am
To throw an added layer to this (perhaps a less asked and more interesting question), I’m also seriously considering (probably even leaning) towards renting rather than buying. We’d likely rent a slightly less expensive place, though not drastically so (thinking ~1k of monthly savings compared to a mortgage + prop tax). The wife and I are both tired of spending money/time on home repair, and I think the added flexibility of being able to upsize/downsize easily if my earnings improve/deteriorate + the flexibility of having that extra capital for potential opportunities make it appealing.

I think to me the biggest factor here is the opportunity cost of not being able to invest the down payment (call it $200k). The wife is a partner at her firm and gets an opportunity to purchase a given number of shares each year that have no tax consequences until she begins selling the shares near her retirement. This is a big engineering firm with ~4000 employees, ~$1B in revenue, and a very strong record of stock performance (avg ~13% over the last 20 years w/ S&P at 6.3% in that time frame, with similar std dev of returns and 75% of the downside deviation of S&P) so it’s a relatively safe investment (as far as a single company can be). Additionally, not purchasing the full amount of offered shares sends a bad message and can stall her career development.

So I think the opp cost of the down payment is higher than in many situations and that there’s some benefits to maintaining optionality w/ that capital. Additionally, I think there’s some added value of the increased flexibility of renting given the high variance nature of my income.
I’ve played around with online ‘rent vs buy’ calculators and built my own, but I’m curious if there are any insights from the Boglehead community that I may be missing. Sorry for the length, brevity has never been a strength…
Did you post this so folks would talk you out of renting? It sure sounds like you would rather rent and put the down payment money to work elsewhere. Sorry, what's your question about all this? I don't believe I read one pro you listed about home ownership for you guys, so.....

I'll throw a question back at you. For what, if any, reasons would you guys even want to buy a house?

No to your first question. If anything, I posted this to get confirmation/validation that renting seems like the right move in our specific case. I think conventional wisdom is that if you can afford the down payment on a home and would spend something similar renting, you should always buy. I think the answer is far more nuanced than that (as I'm guessing most people on here do as well), but always want to consult other informed people before making big decisions like this.

My point was to provide the information that the non-financial reasons for buying vs renting tended towards renting in our case.

Reasons to buy rather than rent are 1. Stability for a growing family, particularly once the kid(s) start school. 2. if the return on investments that are bought in place of the down payment is lower than the return on the home, obviously buying would have been better. 3. The potentially very annoying outcome of moving every year or couple years. 4. Tax benefits of buying

Topic Author
bballjm
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Joined: Mon Nov 01, 2010 11:52 pm

Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by bballjm » Tue Aug 13, 2019 10:30 pm

Aku09 wrote:
Tue Aug 13, 2019 4:00 pm
With the huge variation in income due to bonuses I would be a bit more leery of jumping into a large mortgage as other posters have said. I would try to afford a home based on your salaries only (even though I know its hard). You have a pretty large amount of liquid assets. Are you looking to spend most/all of it on a home? I would think with your salary you could afford a 500k home without too much stress just on your salaries. Would it be possible to wait a year or two of good bonuses and keep them all to pay for a home? If you had 2 good years of 500k bonuses that would be 1mil. Then you wouldn't have to worry about affording the house.
Just for clarification, I live in a ~$500k home now which we would sell regardless of buying or renting the next place. I definitely agree just waiting a few years to give my new business time to grow and stabilize (or fail and move onto something w/ a higher floor but lower ceiling) would be ideal, but it would be tough to have two kids in our current space and the timeline for that happening is hopefully the next year or so.

Topic Author
bballjm
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Joined: Mon Nov 01, 2010 11:52 pm

Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by bballjm » Tue Aug 13, 2019 10:40 pm

Watty wrote:
Tue Aug 13, 2019 4:08 pm
bballjm wrote:
Tue Aug 13, 2019 8:32 am
Age: 33

.....

Additionally, I run a start-up options trading firm where I can invest alongside and earn the same return the firm earns. It’s a difficult business (see wild fluctuations in my income above) especially when you’re small, but if we end up being successful, there can be exceptional returns.
One thing that jumped out at me is that you have not been through a bad bear market yet. That alone would to make me cautious.

Your wifes bonuses could also suffer in a bad recession and no one is immune from being laid off when a cyclical business takes a downswing.
bballjm wrote:
Tue Aug 13, 2019 8:32 am
I’m currently trying to narrow down from $800k-$1.75M purchase price if we were to buy. I don’t want to be house poor, but also have always had the goal of living in a place that I really love.
The high end of that range is way too high for you now since you would be depending on your wifes bonus and your position does not seem super stable.

Renting a better place for a few years sounds like a good option and if you could save like crazy for another three years or so you might be in a much better position to buy an expensive house that you will be happy with for the long term.

It was not clear how old your kids are. One thing I would look at is when your oldest kid will starts school and maybe buying a house just before they start 1st grade. That way they would be less likely to need to change schools which can be hard on some kids.
Yeah fair point on the bear market. I do think my wife's position is pretty stable and would certainly be expected to continue growing (both in salary and bonus). In the case of a bad bear market, her bonus would definitely suffer but it would have to pretty bad (though certainly not immune) for her to get laid off. For reference, her firm's stock price went up like 50% in the early 2000s when the mkt crashed, but it did suffer pretty big draw downs following the 2008 collapse.

Right now, we have one kid who is almost 2 so he'd be starting first grade in 4 years (I believe!?!) so renting for a few years and reevaluating may be the best bet.

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Nate79
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Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by Nate79 » Wed Aug 14, 2019 6:03 am

You could buy the house with cash and the equity from your current home if you wanted. A paid off home would reduce your risk of volatile income and could easily afford to buy if you actually want to.

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Watty
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Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by Watty » Wed Aug 14, 2019 6:25 am

bballjm wrote:
Tue Aug 13, 2019 10:40 pm
Right now, we have one kid who is almost 2 so he'd be starting first grade in 4 years (I believe!?!) so renting for a few years and reevaluating may be the best bet.
bballjm wrote:
Tue Aug 13, 2019 8:32 am
but childcare exp will jump $3.5-4k/month in 1.5 yrs or so with two kids going to day care
If you are still working on having the second kid then I would definitely not buy a house yet that is anywhere near the high end of your price range.

Nathan Drake
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Re: How much house can we afford (Another One...) and Rent vs Buy decision

Post by Nathan Drake » Wed Aug 14, 2019 8:25 pm

Nice, I love these topics featuring the average boglehead ;)

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